Most business owners have a feel for how their business is doing but really successful business owners can tell you five accounting measurements that drive their business.
1. RevenueFor all businesses revenue is a key driver for success, but it is relative. That means that revenue as an indicator is relative to the past and to your market. Is your business doing more revenue than it did last period and last year? Is your business doing well for the market you are in? Plastic surgeons in Dallas should be doing much better than their peers in any other part of the world. Finally, how is your business doing relative to the amount of time you have been in business. Start-ups typically start out slow and build up to a mature level of business. Good business owners not only have a feel for their revenue but they know what their accounting reports reflect relative to the past, their market, and the maturity of their business.
2. Your MarginWhat is the margin on your products? To have a handle on this your accountant needs to separate your costs between fixed costs and costs that fluctuate depending on how much your business sells. Your margin is an accounting ratio of your revenue to your variable costs to produce and sell your product. Typically these variable costs will include your product or raw material costs, your labor to produce your product, and other expenses associated with production like utilities and supplies.
Understanding this accounting ratio is to know that to make money with low margins you need to sell more and to make money with high margins you really need to standout. While Chevrolet typically sells a lot of cars, they need to because their margins are narrow. On the other hand Mercedes Benz is not as concerned about volume because their margins are strong and so is their product.
3. Fixed CostsHow much are you committed to paying out each month? Your fixed cost just keep coming whether business is good or bad. Your fixed costs are things like rent or your loan payments, overhead salaries, etc. When you choose your facilities as a part of your strategy you are committing to a fixed accounting cost structure and you better get it right. Big manufacturing plants, offices, etc. mean you have to have enough revenue and big enough margins to cover those costs and have money left to pay yourself and your investors. There is a huge difference between a low overhead online shop and having physical stores all over the world.
4. Current MarginCan you pay your bills this month and the next several months? Your current margin is the difference between your current assets and current liabilities. In accounting your current assets are assets that are liquid or will be within the next twelve months. Your current liabilities, on the other hand, will be due within the next twelve months. Ideally your current assets are more than your current liabilities. If they are not you need a good plan that perhaps includes a line of credit. But it starts with knowing where you stand based on your accounting systems.
5. Debt to EquityHow much do you owe and how much is yours? In accounting your debt to equity ratio is a key indicator of the health of your business. You need to be able to cover what you owe in long-term debt or you will have to take money that you thought was yours to meet those obligations. This ratio determines the difference between wealth and bankruptcy.
These five accounting indicators are the key to knowing and managing your business to success. Really successful businesses have an accountant to help them understand what these accounting indicators mean and to help them develop a plan that will lead to success and wealth.
Additionally different business have other indicators specific to their industry that tell a story about how their business is doing. There is no one size fits all, but it helps to know your key indicators and have a CPA to help you track them and discuss what is going on and strategies for the future.
The CPA Superhero wants to help you to succeed in business, life, and in retirement. While my main business is preparing tax returns, I also work with clients to setup accounting systems to start, manage and develop their business(es) and develop and implement a financial plan. Contact me using my information below to schedule an initial phone conversation.